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Incredible India! M-Payments and Prepaid Poised to Define Financial

Institutions Delivery of Banking & Payment Services to Rural India
Emerging Market Perspective Series: Report 2 of 2
By Amit Sethi

Executive Summary Today its fairly common to see a passenger board an international flight in New York by presenting a smart phone loaded with an e-boarding pass or a train in Italy by displaying a quick response codeenabled e-ticket on an iPad. Mobile transactions are catching on in developed markets as consumers increasingly move away from computers and on to a new generation of mobile devices. The next wave of electronic transactionsmobile payments, or m-paymentsis on the verge of surging. This is especially true in emerging markets like India where frugal innovations could fill enormous market voids that leave large populations at the bottom of the pyramid (BOP) underserved. In particular, the symbiotic relationship between prepaid and mobile phones defines a natural entry point for inclusion of the rural unbanked into the formal financial system and would support adoption on a mass scale. Innovation at the intersection of these two already widely adopted services by Indias BOP consumers is a market opportunity ripe for development by financial institutions.
national may largely be missing the boat on tapping the significant potential of the BOP market. According to C.K. Prahalad, Multi-National Corporations (MNCs) often assume that the default rate among the poor is likely to be higher than that of their rich customers. The opposite is often true. The poor pay on time, and default rates are very low.4 This misperception is just one reason why FIs have not made inroads with BOP customers. Other challenges include the BOP markets lack of credit history, the countrys nascent credit bureau infrastructure and national ID system, and limited penetration of the formal banking and payment systems across rural India. Several compelling factors, however, should prompt FIs to rethink their conventional wisdom on such potential customers, particularly in India where opportunity abounds and partnership across consumer-facing industries could prove fruitful.

In particular, the symbiotic relationship between prepaid and mobile phones defines a natural entry point for inclusion of the rural unbanked into the formal financial system and would support adoption on a mass scale.
Earlier in 2011, Yankee Group forecasted unprecedented growth in mobile transactions worldwide, with the total value of global mobile transactions increasing from $162 billion to $984 billion in 2014.1 This represents a compound annual growth rate (CAGR) of more than 90 percent. Industry analysts predict Indias share of global transactions will exceed $1 billion by 2014. Indias electronic payment transactions at the point of sale (POS) are experiencing 40 percent growth annually.2 A recent report from The Economist on the state of international banking noted that banks in emerging markets are leapfrogging their rich-world rivals in efficiency, technology and innovation and as a result are growing annually at 20 to 25 percentoften more.3 At the same time, financial institutions (FIs) domestic or multi-

The significant mobile subscriber base and percentage of unbanked create a compelling proposition for FIs and mobile operators to form partnerships in support of mobile payments and services.

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

Future Cast: Mobile Banking & Payments

Urban User Base Urban user base expected to reach 65 million by 2012 as compared to 23.5 million in 2009 As of 2011, the current mobile phone subscriber level is more than 800 million and increasing15 Rural User Base Rural user base expected to reach 60 million by 2012, driven by RBIs constant promotion of financial inclusion Active User Base Active user base is expected to increase to 2 percent in 2012 from 0.2 percent in 2009 3G Services Roll-out of 3G services should boost the usage of mobile for payments as faster, better and broader set of voice and data services that can be provisioned over 3G networks Regulatory The RBI has also defined guidelines for Indias mobile banking industry and is focusing on improving banking convenience and efficiency, reducing intermediation costs and ensuring security
Source: India Electronic Payment Market Opportunity Study: Executive Summary. TSYS/ Evalueserve, May 2011.

to Accelerate Electronic Payment Adoption. The second type of transaction includes mobile-based payments, (referred to throughout this report as m-payments) which have the potential to transform the banking landscape for Indias underserved rural populations. This report will explore how the untapped market opportunity of m-payments can act as both a significant market opportunity for FIs and a great equalizer for BOP consumers in rural India. It will then discuss the key market indicators that highlight the sea change underway in electronic payment transactions, specifically m-payments, in India: 1) the promise of frugal innovation as an alternative to expensive infrastructure improvements needed to expand limited access to retail banking outlets; and 2) high and rapidly rising mobile tele-density, combined with increasing familiarity with and receptivity to prepaid payment instruments. This includes no frills accounts, which are changing the traditional cash is king attitude among rural consumers. Next, the report identifies some challenges that exist for m-payment adoption and calls out the key lessons learned from the successful penetration of rural markets by fast moving consumer goods (FMCG) partners, known in the U.S. and Europe as consumer packaged goods companies. Finally, this report explores elements fundamental for m-payment adoption, including prepaid payment cards, partnerships between FIs and mobile providers and the proactive and supportive role of the Indian government, all of which can help fulfill the goal of bringing consumers into formal and organized financial markets that are accessible, secure, convenient and rewarding. Improving connections between these complementary industries and the government could provide great rewards for all constituents.

First, unencumbered by the need for consumers to transition from old to new technologies, emerging markets like India are poised to outpace other more established markets in the adoption of m-payment transactions, especially among the rural unbanked. Indias vast and established mobile networks have the ability to supplement the traditional branch-based approach to banking. This would allow mobile to provide the technology platform and the distribution channel for extending banking services to rural populations. In other words, mobile operators already have in place extensive rails covering a significant portion of the country on which the payments industry can ride in order to deliver m-payment services. The financial sector in India is well positioned to develop two distinct and complementary types of electronic payment transactions, which may materialize simultaneously.2 The first is the more traditional card-based payment model, which is discussed in report one of the Incredible India: Emerging Market Perspective series, titled, Four Imperatives

In an interview with The Economist, the former Chairman of State Bank of India (SBI) pulled his mobile phone out of his pocket and stated, This [the mobile phone] is the [bank] branch.

Mobile as the Bank Branch: A Promising Alternative to the Informal Financial Markets
Financial reports claim economic growth in rural markets has surged nearly 40 percent beyond that of urban markets, which have been increasing at 20 percent, and rural growth now accounts for half of Indias GDP.5 Just as FMCG companies have tapped into Indias rural market opportunity, a distinct opportunity exists for financial services in serving the rural unbanked. McKinsey & Company estimates that informal lending in rural areas

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

amounts to $85 billion, roughly one-third the amount of credit from the formal financial systems.6 Many of Indias unbanked are engaged in agrarian activities. At the end of a harvest season, without a financial mechanism such as a savings account to carry them over until the spring season, kitchen utensils have sometimes acted as a storedvalue system. Bought at the end of the harvest, the utensils are stored until cash is needed to invest in the next cycle of farming operations. Janmejaya Sinha of the Boston Consulting Group in Mumbai speaks to the creativity of the rural poor who devised these unusual and primitive financial products: In the past they would buy kitchen utensils and keep them unused, then sell them back to the merchant for a 10 percent discount when they needed money for food. Now technology is supplanting kitchen utensils.3 In the formal markets, it is hard to imagine a customer promotion designed with the expectation of a 10 percent loss at withdrawal as an attractive customer acquisition strategy, but in the agrarian society of rural India it is treated in a way similar to insurance. Mobile as a consumer servicing channel is a global phenomenon, but nowhere more so than in emerging markets like India. For FIs in India, a platform that provides the ability to package payments and alerts and deliver key customer payment transaction services is one begging for expansion. For India to meet the markets expectation of its emergence as a powerful global player and ensure sustainable market growth a stated objective of the Reserve Bank of India (RBI) developing a financial ecosystem inclusive of the rural unbanked will be critical. Partnerships between the leading mobile operators and FIs are already being formed to meet this objective. Joint ventures, such as that between Airtel and State Bank of India (SBI), highlight the potential for global or domestic FIs to partner or strengthen existing relationships with mobile carriers operating in India. These partnerships can help provide m-payment transactions that support basic banking services for Indias rural population, an extremely large and underserved population of more than 800 million, 600 million of whom are estimated to be unbanked.7 The Economists World in 2011 predicts the Indian m-telephony revolution will not just be about phones, but also about networks that will enable mobile phones to be a great equalizer connecting the underserved to the rest of India and the world. These networks will allow Indias rural populations to access current crop prices, enabling price discovery, transparency and other benefits from a host of services and information previously unavailable. However, millions of ordinary Indians will get online, cheaply, for the first time in 2011.8

In Addition to Public and Private Sector Banks Other Types of Institutions Serve the Rural Markets
Regional rural banks Banks primarily serving rural markets, smaller than those operating in metropolitan markets At least 80 banks with the number of branches totaling approximately 15,00032 Cooperative banks A retail or commercial banking operation that is customer owned with presence in urban and rural centers The core services are savings and loans Approximately 7,300 cooperative rural bank outlets / 2,069 urban outlets10 Micro finance institutions (MFIs) Offer small-scale financial services to rural poor More than 3,000 MFIs exist. The leading 10-12 MFIs handle more than 60 percent of transactions The draft Micro Finance Bill 2011 proposes bringing all aspect of microfinance under the RBIs oversight Financial inclusion providers These organizations FINO & ALW contract with several banks offering them access to their technology and distribution channels Across the country-appointed agents, Customer Service Providers (CSPs) service villages, handling deposits and withdrawals via a handheld terminal, mobile device Acting as a mobile ATM, CSPs batch the data back to the bank on daily basis11

These market indicators suggest a high probability that the rural unbanked mobile subscriber could advance directly to m-banking services, bypassing traditional banking channels, products and payment solutions.5

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

Indicators Point to a Market that is Primed for M-Payments Adoption

Limited Access to Retail Banking: Frugal Innovation as an Alternative to Expensive Infrastructure Improvements For banking services to reach the rural unbanked, FIs will need to either focus on expensive investments to build out the network of POS devices and automated-teller-machines (ATMs), or design innovative solutions or alternative distribution channels to provide banking services that are affordable and accessible by all. More than 70 percent of Indias population lives in rural villages with limited or no access to the most basic banking and credit services, including deposits, withdrawals, balance inquiries, small loans and basic payment services. Urban markets are attractive to FIs, but even with a variety of institutions serving portions of the rural markets regional rural banks, cooperative banks, micro finance institutions and financial inclusion providers an opportunity exists for FIs to provide additional services or supplement current ones. To date, the banking industry has focused on providing electronic payment mechanisms primarily to the burgeoning middleclass in the urban or semi-urban markets. As a result, Indian consumers accelerating shift from cash to electronic transactions has been largely limited to the countrys urban

pockets. For banks extending into rural markets, its not just the weak infrastructure that presents a challenge, but also the small average transaction size commonly referred to as a micropayment made by the rural poor that presents challenges for service delivery. For these reasons, the cost to conduct business in these markets has often outweighed the returns. Mobile payments present an excellent, ready-made alternative channel for harnessing Indians mobile phone usage. According to Gartner, by 2013 Indian texting could reach 192 billion messages.9 Mobile technology has the potential to bridge many of the current market gaps, close the urban-rural divide, cultivate financial inclusion, and bring the Internet-based information age to millions all for the benefit of consumers, the financial sector and the countrys economy. The rural market in India represents an extremely large and underserved population, many of whom engage in the $85 billion informal credit market.7 For this market segment, mobile phones present an attractive and nearterm solution to leverage mobile operators established and extensive networks that reach into these underserved markets. In fact, due to the ubiquitous nature of mobile phones in Indias rural environment, mobile payments could advance and gain deeper market penetration than traditional card-based payments in Indias 600,000 villages, of which approximately 550,000 have no access to banking, credit or Internet services. Figure 1 demonstrates the growing opportunity for m-banking at current trends. Global or domestic FIs in partnership with mobile operators hold the potential to develop payment channels utilizing a technology platform that is operationally scalable across geography, culture, education level and language barriers, while equalizing the imbalance of access between urban and rural segments. Mobile payments are a quicker, more efficient and more economically viable solution for FIs to provide banking services for consumers and merchants in these rural underserved markets. The ubiquity of mobile phones in rural India provides FIs with an attractive alternative to expensive infrastructure improvements. This strategy leverages the disruptiveinnovation theory, which advocates driving growth through new offerings that are simpler, more convenient, easier to access or more affordable...12 In India this is commonly referred to as a frugal-innovation, taking into account the needs of poor consumers by stripping the product down to its bare essentials. An article from The Economist underscores that while cutting costs is at the core of these innovations, frugal does not mean secondrate, as the products must be user-friendly, durable and relevant for local market conditions. As an example, Nokias mobile handsets include a flashlight function in case of power outages, which occur frequently in India.13 Indeed,

Mobile as an Acceptance Point Automating the Rural Supply and Demand Chain
Across the rural supply and demand chain, mobile could automate and transform the process for buying and selling goods & services.
Step 1 Manufacturer to Regional Distribution Center Manufacturer and distributor can accept and track orders and exchange payments. Step 2 Regional Distribution Center to Retailers & Kirana (neighborhood) Stores in Rural Markets Mobile wallet can access a prepaid card or line of credit for transactions with smaller merchants. As a payment acceptance device, mobile device price points would need to fall significantly to become a viable merchant option. Step 3 Kirana (neighborhood) Stores to End Consumer Customers are incented with convenience, product discounts, and loyalty/ rewards at point of sale if transaction is by mobile payment.

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

the simplest and cheapest mobile handsets in India also allow users to engage in video games, access the Web and conduct basic financial transactions. Rising Mobile Tele-Density and Prepaid Card Propensity: Changing Attitudes About Cash Among Rural Consumers Today, the high mobile tele-density level in Indias rural environment provides FIs the ability to offer Internet and mobile banking services without a bank branch.14 For Indias population of more than 1 billion, the promise of electronic payments is fueled by the sheer volume of micro transactions given the size of the market and the number of mobile subscribers. As referenced in an earlier sidebar, the total mobile banking (m-banking) subscriber base in India is projected to reach 65 million by 2012 as compared to 23.5 million in 2009.2 This is a mere fraction of the total mobile subscriber base of more than 800 million in 2011.15 Currently, the majority of m-banking transactions support payments for utility bills, mobile recharge, movie tickets and airline tickets. As urban mobile penetration levels peak, most of the growth is driven by rural and semi-urban areas. Deloitte reports that subscriber levels increased 35 percent between March 2009 and 2010, with tele-density levels of approximately 30 percent.16 This translates to approximately 8.76 million new mobile phone subscribers per month in rural areas between December 2009 and March 2010.5 Particularly compelling is a report on The India Prepaid Card Market that states the number of mobile phones in rural India reached 236 million as of July 2010.5 This figure exceeds the estimated number of rural bank account holders 187 million adults and far outpaces the total populations access to broadband Internet at 8.8 million connections as of March 2011.9 In Indias rural communities, mobile phones are significantly more common than financial outlets. The majority of mobile phones operate on a prepaid model, and consumers are both comfortable and reliant on credit or stored value. These market indicators suggest a high probability that the rural unbanked mobile subscriber could advance directly to m-banking services, bypassing traditional banking channels, products and payment solutions.5 In an interview with The Economist, the former Chairman of the State Bank of India (SBI) pulled his mobile phone out of his pocket and stated, This is the [bank] branch.3 Prepaid cards already fill a distinct market niche for many Indian consumersas evidenced by skyrocketing growth projections of more than 50 percent for a customer segment estimated to be approximately 600 million.5 Furthermore, the fact that mobile carriers recharge plans are based on the prepaid model suggests that many consumers in this market segment are already comfortable with the idea of

Penetration Rates 5
Banking Services POS: ATMs: Bank Branches: Population:8

Rural
24% 5% 30% 70%

Urban/Semi-urban
76% 95% 70% 30%

Sources: The Indian PrePaid Card Market. Published by VRL Financial News Ltd 2010. The Economists The World in 2011.

Figure 1: Unrealized Opportunity for M-banking in Rural Areas

rural m-phones and bank accounts

(in hundred thousands)

rural branches

(in thousands)

900 800 700 600 500 400 300 200 100 0 2010 2011 2012 2013 2014

60 50 40 30 20 10 0

# of Mobile Phones # of Bank Accounts

# of Rural Bank Branches Unrealized Opportunity for M-banking

mobile electronic transactions. According to Edgar, Dunn & Co. Director Samee Zafar, The link between a prepaid product and the mobile device is crucial. A prepaid wallet on the mobile helps consumers send money to others, pay for goods and services, and also pay their bills. A linked branded prepaid card allows mobile wallet users to make in-store purchases and withdraw cash. If the card is scheme branded, Visa, MasterCard, or RuPay consumers will have the ability to make payments or withdraw cash wherever these brands are accepted.17 This familiarity with prepaid cards for mobile applications indicates a high likelihood that rural Indian consumers will accept mobile phones as their e-wallet for money transfers or other types of electronic payment transactions.

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

FMCGs Evolving Roadmap for Penetrating Rural Underserved Markets FIs expanding their reach to rural populations could adapt frugal innovations and cross-industry collaborations deployed by Indias leading FMCG companies. Poised to become a $100 billion category by 2025,18 Indias FMCGs have adopted strategies and developed products, customer value propositions and distribution channels to address the host of challenges inherent in penetrating and serving the rural market segments. Led by industry giants such as Unilever, Proctor & Gamble (P&G), Imperial Tobacco Company (ITC), Reliance and the Tata Group, these global companies have successfully addressed Indias market conditions that pose challenges in accessing remote rural villages. The success of FMCGs is attributed to growth driven by designing simpler products often offered in smaller formats, increased accessibility enabled through unique distribution channels, and the ability to offer products at lower price points and value the key tenets of successful disruptive or frugal innovations. Based on this premise, P&G recently launched the Gillette Guard Razor, a cheaper but effective alternative for men in rural India who lack indoor plumping and dont shave with regularity.12 Unilevers Indian subsidiary, Hindustan Unilever Ltd. (HUL), devised an innovative rural distribution channel called Project Shakti.19 HUL describes Project Shakti as a direct-to-consumer sales model relying on female microentrepreneurs. This rural sales model and distribution channel has infiltrated Indias rural markets, driving positive social change, opening new markets and generating business from what HUL refers to as a fast-growing global market of low-spending consumers.20 Multi-sector partnerships could strengthen the distribution model. HUL, together with SBI, is piloting a program in which the HUL micro-entrepreneurs also serve as customer service providers (CSPs). HULs Shakti Ammas, women who sell HULs consumer products in rural India, have doubled up as CSPs and opened around 1,000 [bank] accounts for rural folk.21 The two key takeaways from FMCGs success include: (1) how to cost-effectively and successfully penetrate the rural customer segments with frugal innovations and (2) how FIs could leverage existing distribution channels whether those of the FMCG or mobile operators to extend the reach of electronic payment transactions and the acceptance of m-payments. One potential approach would entail leveraging crossindustry collaboration. Specifically, this would be a unique opportunity for banks to integrate the rural supply chain with mobile payments in essence, automating the distribution value chain with the potential to reduce administrative costs, control revenue leakage, speed data capture, and provide data for analyzing customer behavior and rural market

trends. FIs, mobile operators and FMCGs hold a common interest in serving Indias rural customer segments in a viable manner while also creating a positive social impact. As FMCGs customer segments become more comfortable operating within the formal banking sector, consumers increased lines of credit will allow for the purchase of larger product formats for family use or in micro-entrepreneurial pursuits. Further establishing partnerships among FIs, mobile carriers and FMCGs would allow FIs to leverage FMCGs consumer mind share, as well as their proven and unique rural distribution model, to create awareness and educate these customer segments on the benefits of m-payments. Rural markets are ripe for electronic transactions, but a key factor for gaining momentum entails making a concerted and significant effort to increase customer awareness, incentivizing them to activate accounts and adopt new payment behaviors.

Two Key Takeaways from FMCGs Success: 1. How to cost-effectively and successfully penetrate the rural market customer segments with frugal innovations 2. How FIs could leverage existing distribution channelswhether those of the FMCG or mobile operatorsto extend the reach of electronic payment transactions and the acceptance of m-payments

While FMCG products achieve penetration through innovative package formats, attractive price and value propositions or distribution channels, FIs and mobile operators must seek industry innovations relevant to their own market challenges and objectives. The margins and growth projections will vary across industries, but the micro-transactions defining the rural banking market will be driven by the sheer volume of customers and their usage frequency. Even so, the overarching concept of extending electronic payment transactions into rural markets by way of a viable, cost-effective and scalable model may be most effectively achieved through cross-industry collaboration. New Connections Signal Promise of M-Payments Unlike the U.S. market where mobile payment transactions threaten FIs traditional revenue models, the potential to create a financial ecosystem that leverages mobile phones in India offers scale beyond any other distribution

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

channel and new revenue streams. Competition among handset manufacturers has spurred falling prices for mobile handsets, calling rates, data plans and launch of faster 3G services. All are advantageous for Indian consumers, but place immense downward pressure on mobile operators operating and profit margins as shown in figure 2. Tethering to FIs payments initiatives offers Indian mobile operators potential relief through incremental revenue streams derived from enabling m-payment transactions while offering FIs a cost-effective approach to reaching rural markets. Partnerships between mobile operators and FIs are forming with more likely to follow. The most notable joint venture is between the countrys largest commercial bank, State Bank of India (SBI), and its largest telecom provider, Bharti Airtel, which is perceived as a world-class operator. This partnership represents one of the boldest efforts to bring the unbanked into the formal financial sector. In lieu of bank branches, the venture designates Bharti Airtels retail outlets as Customer Service Points, physical locations where customers can open SBI bank accounts and handle basic banking needs. This would be a model most similar to reloading prepaid cards or mobile minutes at a convenience store or other outlet. As stated by Airtels Chairman, This historic collaboration between SBI and Airtel will create a scalable operation that will address the banking requirements of millions of Indians through the mobile platform.22 According to Noel Gordon of Accenture, They [SBI] are using the unbanked as a big laboratory to pilot new ways of banking. The phone really is the branch, extraordinary though it may seem, and it is taking SBI into 100,000 villages that have no other banks.3 While the public sector banks are connecting with mobile operators, the private sector banks are also pursuing similar partnerships. One such venture is between Vodafone Essar, the second largest mobile operator, and ICICI, the countrys largest private bank. According to ICICI, the partnership offers a range of services in a simple, consolidated menu. Now you can carry out banking transactions like funds transfer, bill payment, balance enquiry, locate a branch, view last five transactions and much more through your mobile phone.23 As Indias public sector, and, to a lesser degree, private sector domestic banks set the foundation for m-banking and m-payment services in rural markets, their efforts are developing this markets category and spurring competition. This presents an opportunity for other private sector and foreign banks to complement or directly compete in the rural markets. Already, international banks are piloting programs in 2009, for example, Citibank launched Citi Mobile. According to N. Rajashekaran, Country Business Manager, Global Consumer Group, Citi India, said, Given

Figure 2: Indian Mobile-operators Percent Return On Capital

30% 25% 20% 15% 10% 5% + 0% 5% 2006 2007 2008 2009 2010 2011

Bharti Airtel Idea Cellular

Reliance Com. Vodafone

Source: Happy customers, no prots: Indias mobile industry is magnicent but also a mess. economist.com. 16 June 2011.

the recent growth trends in mobile phone usage in India, we expect this to grow into a significant channel for customer service and contact.24 These banks are competing for the business of rural customers, offering consumers choices while opening previously inaccessible markets. This is a win-win for allFIs, mobile operators, customers, merchants and the government. For FIs, offering these value-added services grows the revenue pie for the entire industry and their organizations, while mobile carriers benefit from a new revenue stream. For mobile operators incremental revenue streams improve their ability to generate a positive return on costly investments in building a network. Currently, as figure 2 shows, only one of the big four firms was close to recouping its cost of capital last year as the price war hit margins and an expensive 3G spectrum auction in 2010 bloated balance-sheets.25 The win for the government is the fruition of its financial inclusion vision and the additional tax revenue created by drawing people out of the gray and informal markets and into the formal banking sector. The win for consumers, particularly the underserved BOP, is the convenience of mobile payments and the expanded access to basic banking services, such as checking and savings, money transfers and credit-based services that integrate them into the formal economy. With more consumers participating in the formal markets, merchants can grow transaction volumes and revenues.

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

The Challenges Ahead for M-Payments: Syncing Capabilities with the Market Need Even though market indicators for the adoption of m-payments are both strong and promising, obstacles do exist. From the consumer perspective, adoption of electronic transactions could face similar hurdles as card payments in rural Indialow awareness, lack of merchant acceptance capability and overall security concerns. From a technology perspective, the current m-payment capabilities present limitations requiring increased collaboration between FIs and mobile carriers. The simplicity of mobile phoneslike those offered by MicroMax or Karbonhas allowed for a reasonable price point as low as $20. These stripped down smart phones still enable basic features and access to applications like Facebook or Twitter. However, in order to handle electronic payment transactions safely and securely, the handsets will require more robust security and fraud detection, data storage and processing capability. From a merchant perspective, further engineering would bring down the cost of using mobile handsets to accept in-store payments. Another problem is the lack of interoperability standards for mobile wallet payments across banks and mobile operators. A street vendor selling fruits and vegetables via mobile terminals would need to be compliant with PCI standards to allow for printing or electronically transmitting customer transaction receipts. Currently, the cost of payment acceptance via mobile devices could more than double the cost of a fixed point-of-sale terminal. Even with current limitations, electronic transactions are an exciting reality for providing hundreds of millions of consumers with banking and payment services in a lowcost and convenient manner as a realistic and compelling alternative compared to cash or kitchen utensil transactions.

is addressing key areas important to the development of this market: the expansion of POS infrastructure, the proliferation of business correspondents and the creation of a national identification method. Expansion of POS infrastructure and Role of Business Correspondents The demand for POS and ATMs outpaces current acceptance points; however, growth is trending upward.26 The SBI plans to install more than 500,000 POS terminals with a percentage destined for rural markets. The lack of access to banking and payment services affects consumers purchase behaviors whereas electronic payment transactions and credit-based services should accelerate the volume and value of services and goods exchanged across rural India. According to C.K. Prahalad, Often, the decision to buy for Bottom of the Pyramid consumers is based on the cash they have on hand at a given point in time.4 The current banking infrastructure and alternative distribution channels are not yet capable of meeting consumer demand. RBI has fostered a regulatory environment amenable to the proliferation of business correspondents who can promote financial inclusion by extending the reach of basic banking services into rural environments. These bank-endorsed and supervised correspondents act as intermediaries that handle basic banking services, such as remittances, withdrawals and new account openings in markets without adequate penetration of bank branches, ATMs, POS terminals or kiosks. As described in The Economist, To reach remote villages, SBI is appointing agents equipped with mobile phones attached to card readers. Customers swipe their savings card on the phone and hand their deposit to the agent, who pockets the money. When they wish to make a withdrawal, he reaches into his pocket for the cash.3 The one caveat is that this payment mechanism highlights the need for equipping individuals with a method for identity authentication. National Proof of Identity Positions Individuals for Formal Banking Eco-system Identification, in a legal or verifiable format, is a critical infrastructure element for conducting transactions in the formal banking market. In a recent online PYMNTS.com forum, one participant stated, Who wants to carry a cell phone and a wallet around if just your cell phone will do? Eventually everything will be on there, your cards, your cash, your ID.27 For consumers in developing markets like India, where cash still trumps payment cards, legal identity documents and address proof documents ration cards, passport or drivers licensesarent held by many people operating outside of the formal markets, thereby preventing their access to banking and payment services. Lagging card issuance and card payment adoption rates most likely are attributed to consumers overall security concerns, generally

Beyond identifying and articulating the significance of mobile phones as a delivery channel, the government is addressing three key areas important to the development of this market: the expansion of POS infrastructure, the proliferation of business correspondents and the creation of a national identification method.
Creating the M-Payment Foundation: Areas the Government is Addressing RBIs mandate for FIs to provide banking services that are both affordable and accessible to all underscores the significance of mobile phones as a delivery channel. Beyond identifying and articulating the significance of mobile phones as a delivery channel, the Indian government

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

Figure 3: Mobile Banking Transaction Trends: Amount vs. Volume Analysis for All Banks

2009
Sum of Value (Rs#) 600M 400M 200M 0M 1000

2010

2011
Sum of Volume 600K 400K 200K 0K

Rs. Per Transaction

500 0 May Aug Oct Nov May Aug Oct Mar Nov Jun Jul Sep Dec Jan Feb Apr Jun Jul Sep Dec Jan Feb

Amount (in Rupees)

Transaction Volume

Amount Per Transaction

Source: Mobile Banking Transactions In India 2009 To 2011. charts.medianama.com.29

low awareness levels and a lack of legal proof of identity. Clearly, lack of positive identification hampers organizations customer acquisition ability, customers transaction ability and ultimately impacts the overall growth of the payments market. The Indian governments implementation of a unique identification number for every citizen based on demographics and biometrics is essential for fulfilling the financial inclusion vision by enabling residents to easily verify their identity to public and private agencies across the country.14 This enables customers to open bank accounts, establish credit histories and transact safely, all of which is instrumental for the growth of payment services across the country. Connecting the UID to a mobile subscribers phone number facilitates the security and convenience of m-payment transactions. The first 12-digit UID number was assigned to a villager on September 29, 2010.28 The eventual plan is that UID numbers will be assigned to everyone residing in India. The UID might not be the critical trigger ushering the rural unbanked into the formal banking eco-system, but it will be a key accelerator for electronic payment transactions reaching their tipping point. Disbursement of Government Benefits Leveraging Mobile, Prepaid and UID In India, dozens of government and social welfare schemes exist to cover food, education, health services, fertilizers, petroleum and transportation for the economic development of rural and underprivileged groups. According to a May 2011 World Bank report, India spends over 2 percent of GDP [or $20 billion] on core safety

net programs, including some of the schemes listed.30 Total disbursements is believed to be up to three times what is spent on such core programs. One of the key catalysts of growth for mobile payments will come from leveraging mobile, prepaid and UID for distribution of these government benefits. This approach is an emerging trend that is being explored in BRIC countries. In fact, the Prepaid International Forum recently collaborated with leaders from India and Brazil to discuss the potential of prepaid, from which mobile is a clear and natural extension. As stated by Glaucon Pereira, CEO of ATIVI Telecomnet and Chairman of PIF Brazil, It was interesting to note that for both markets [Brazil & India], the potential for prepaid to facilitate social inclusion is vast in that prepaid offers a secure, low-cost medium to distribute social benefits and pensions.31

The lack of access to banking and payment services affects consumers purchase behaviors whereas electronic payment transactions and credit-based services should accelerate the volume and value of services and goods exchanged across rural India.

For rural India, leveraging m-payments for social programs would allow a recipient to walk into a business correspondents office and use their UID number to open an account connected to a reloadable prepaid card or

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Incredible India! M-Payments and Prepaid Poised to Define FIs Delivery of Banking & Payment Services to Rural India

a prepaid accessed via their mobile phone. Currently, the welfare schemes covering food are put on a ration card accepted only at certain food outlets catering to this program, such as the Fair Price Shops. Using m-payments as the disbursement channel would provide multiple benefits including securing fund distribution, streamlining the process, reducing leakages, decreasing the manual paperwork and reducing overall costs of disbursement. This proposition is attractive, as most of the recipients of subsidized social programs are not bank account holders but do have a mobile phone. Furthermore, this channel could limit usage of the funds in accordance with each of the schemes rules, for example by limiting purchases to specific merchant category codes.

mobile payments are best positioned to reap the rewards, in this case the potential of ushering millions from the informal banking system into the formal one. While this report does not predict when exactly mobile payments in India will meet their potential, it clearly outlines the key imperatives that will enable m-payments to fulfill their domestic promise and global role: 1. The financial industrys limited penetration in provisioning technology, banking and payments infrastructure in rural markets suggests it is imperative to leverage mobile telecoms existing distribution channel and networks ability to scale and transcend boundaries. 2. Prepaid already fills a distinct market need for many Indian consumers. This familiarity with prepaid cards for mobile applications indicates a high likelihood that rural Indian consumers will accept mobile phones as their e-wallet for money transfers or other types of electronic payment transactions. 3. The governments vision for financial inclusion for all and its fundamental and proactive measures supporting infrastructure expansion, deploying business correspondents and rolling out a national identity number are imperative for facilitating the extension of formal financial systems to the rural markets. 4. Cross-industry collaboration among FIs, mobile operators and FMCGs is imperative to generate consumer awareness and pull consumers into organized banking and credit markets that are accessible, secure, convenient and rewarding to all market participants.

CONCLUSION
As summarized by The Economist, Indias mobile-phone industry inspires great hopes. Many see it as vital to the nations development: a way of bypassing obstructive bureaucrats and bringing services to the masses, from mobile banking and payments to accurate crop prices. Already a third of subscribers are in rural areas. Mobiles bring the whole world to villages.25 Global and domestic FIs can better leverage prepaid and no-frills bank accounts to fulfill RBIs vision for financial inclusion for all. Furthermore, FIs in partnership with mobile operators have the capability to develop a payment channel utilizing a more defined mobile network, a technological platform that is operationally scalable across the geography, culture and language, while at the same time addressing the imbalance of access between urban and rural markets. FIs that develop expertise and services for the rural unbanked market will influence positive social consequences and benefit economically. FIs that create and guide the growth of

about tsys
Amit Sethi is a 25-year veteran of the global payments industry. During his career, Mr. Sethi has been actively involved in the financial services, technology and outsourcing industries in the U.S. and India. He has held a series of executive positions with companies such as Bank of America, HSBC, Visa International, KPMG, Oracle Corporation and iGate. Mr. Sethi was Global Sales Head of Financial Services and Service Industries for Sutherland Global Services prior to joining TSYS, one of the worlds largest companies for licensed and outsourced payment services, where he is now Managing Director of India and Southeast Asia. Mr. Sethi also serves as Co-Chairman of the India chapter of the Prepaid International Forum, whose members are the countrys leading bank and non-bank issuers, global and national schemes and technology companies. TSYS (www.tsys.com) is a leading global payment solutions provider connecting consumers, merchants, financial institutions, businesses and governments. Through unmatched customer service and industry insight, TSYS offers merchant payment-acceptance solutions as well as licensed and outsourced services in credit, debit, prepaid, mobile, chip, instalments, money transfer and more. TSYS makes it possible for those in the Indian and global marketplace to conduct safe and secure electronic transactions with trust and convenience.

contributors
This report was prepared by TSYS. Contributors to this paper under the guidance of Amit Sethi include: Associate Marketing Director, Morgan Beard; Independent Writer, Carolyn Kopf.

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 2011 Total System Services, Inc. All rights reserved worldwide. Total System Services, Inc., and TSYS are federally registered service marks of Total System Services, Inc., in the United States. Total System Services, Inc., and its affiliates own a number of service marks that are registered in the United States and in other countries. All other products and company names are trademarks of their respective companies. (11/11)